Tax returns for 2016/17, Tax avoidance schemes, Off-plan purchases

We have some shocking news about tax computations for the 2016/17 personal SA tax returns. We also pass on warnings from HMRC about two tax avoidance schemes which are circulating. Finally, we present some timely tips for advising clients who have bought properties off-plan.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Off-plan purchases

When a taxpayer purchases a newly constructed property, he may put down a deposit to reserve the property before it is finished, or even started. This is referred to as buying “off-plan”.

The contract to purchase the property is normally not completed until the property is finished, and at that time the balance of the purchase price must be paid. If the taxpayer can’t pay the balance when requested, he loses the right to complete the contract and acquire the property.

This is what happened to Mr Hardy, who paid a deposit of £72,000 for an apartment in central London, but due to cash-flow problems could not raise the balance of the purchase price when required. He claimed that his lost deposit was a capital loss.

The First-Tier and the Upper-Tier tax tribunals disagreed. Hardy did not acquire an asset when he paid his deposit, and neither did he acquire a contractual right as the contract did not permit him to assign his right to buy the property. His real loss was thus a tax nothing.

However, HMRC do have their cake and eat it on this issue when the taxpayer is a non-resident buying a residential property. In that case, if the taxpayer does dispose of his right to buy the property off-plan, that disposal is subject to non-resident CGT. Also, the start date for any apportionment of a residential period starts from the acquisition of the off-plan right, not from the completion of the property.

Our CGT experts can help with this tricky area.

CGT on overseas properties, Paying PAYE, NMW traps

As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.

What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.

CGT on overseas properties

Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.

If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.

Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.

However, it was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.

This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.